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Argentina has become the next global plaything

Another global crisis hits those who can’t afford the pain.

Argentina's president Cristina Fernandez de Kirchner speaks with economy minister Axel Kicillof during a ceremony for the160th anniversary of the Buenos Aires Stock Exchange last month. The president has gone a long way in reducing her country's national debt. (Juan Mabromata/AFP/Getty Images)

Argentina’s recent default is yet another reminder that the global financial system we all rely on is more fragile than any essential service has a right to be.

If airlines, electric-power grids, hospitals, schools, public health services or, for gosh sakes, city-wide traffic-signal systems operated with the volatility and amorality of global financial markets, we’d be scarcely removed from the hunter-gatherers of old.

Stagnant U.S., European and Japanese economies have yet to recover from the speculation-driven Wall Street collapse six years ago. That calamity was perpetrated by a reckless and greed-obsessed fraction of the 1 per cent, and was enabled by a rickety regimen of negligent self-regulation in the financial sector and lax government oversight.

Now, at a time of widespread political unrest and continued economic stagnation when the world can ill afford another avoidable, manufactured financial crisis, a tiny clutch of mostly U.S. speculators has forced Argentina into defaulting on its national debt.

The global financial media promptly lumped Argentina’s default in with the sovereign debt crisis in Europe and anemic recoveries in the U.S. and the Pacific Rim, along with more recent geopolitical instability in Syria, Ukraine, Iraq and Gaza, to raise fresh alarums about the sky falling.

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The contagion of fear has spread throughout Latin America, raising doubts about economic prospects in the much larger economies of Brazil and Mexico. Brazil, the region’s lone economic superpower, with a GDP 30 per cent bigger than Canada’s, is now expected to eke out GDP growth of just 0.5 per cent this year, half the projected amount prior to the Argentine crisis.

It’s seldom noted that Argentina has not repudiated its debts, as a new Soviet Union did in the early 20th century. Or that Argentina reached an agreement with its creditors after the 2001 Argentina default debacle by which 93 per cent of bondholders agreed to a 65 per cent “haircut” on their securities, and have been receiving regular payments ever since. No payments have been made only on the 7 per cent sliver of debt held by bondholders who balked at the restructuring terms. That is the cause of the current crisis. More on that later.

This has been an occasion to be reminded that Argentina has defaulted on its debt eight times since it gained its independence from Spain in 1816. There is a myth that a wealthy 19th-century Argentina sabotaged its golden future, a fantasy originating with the Argentine elite of the era that was indeed fabulously well off.

The notion that Argentines have been notoriously feckless since — indeed, it is the leading case history on how not to manage a country’s finances — ignores a calamitous history of military juntas and Cold War interference by external powers that characterized all of Latin America in the 20th century. As the noted Argentinian writer Jordana Timerman recently wrote, “Researching why Argentina couldn’t be more like Canada is like trying to figure out why a tadpole failed to develop into a fish.”

That said, Argentina, third-largest Latin American economy after Brazil and Mexico, enjoys relative prosperity by developing world standards. It boasts the region’s second-highest per capita income, slightly trailing Chile.

The government of President Cristina Fernandez de Kirchner has moved mountains in vastly reducing Argentina’s total national debt, from about $80 billion (U.S.) in the early 2000s to $29 billion today.

Argentina has vast oil reserves that remain largely undeveloped for lack of the foreign investment that Canada, for instance, has witnessed in the Alberta oil sands. With all those defaults in its history, Argentina is still regarded as a pariah state by many international investors.

To be sure, sanity prevails among at least some global investors, who see an Argentina poised for significant economic growth.

“This problem is going to be solved, either this year or next,” Luis Caputo, who manages $35 million in Noctua International’s Argentina fund, recently told Bloomberg Business Week. “And once it is, there’s going to be a big boom in Argentina.”

The sound fundamentals of Argentina’s public finances justify that optimism. After all, Buenos Aires dutifully deposited its latest debt payment, of $539 million, with the U.S. bank administering the payouts. And its treasury has an ample $29 billion in reserves with which to finance continued obligations.

Moody’s Investor Services reported early this month, a few days after the default, that Argentina has both the money and the willingness to honour its obligations. Global investors have gradually come around to that view, currently pricing Argentina’s debt at 85.1 cents on the dollar, compared with the 26-cent average to which sovereign-debt bonds drop when countries skip a payment.

That doesn’t mean Argentines are insulated from imminent pain. Post-default uncertainly in Argentina is holding up job creation, business expansion, and development of Argentine oil reserves.

So why the panic, characteristic of the dangerous irrationality of global financial markets? Turns out those “hedgies” holding a mere 7 per cent of Argentina’s post-2001 debt — rank speculators who bought it for pennies on the dollar — are demanding full payment of the face value of the debt.

In buying that debt at grossly distressed prices, the hedge funds had to know that hell would freeze over before they would reap a mammoth windfall by getting special treatment over other bondholders who settled on more reasonable terms.

But the hedgies scored a victory late last month when a Manhattan judge ruled that Argentina must make payments of equal size to both the holdouts and those who long ago made sensible concessions. And the holdouts will accept nothing less than 100 cents on the dollar. That would mean total payments to all bondholders far beyond Argentina’s ability to pay. In arguably misinterpreting an obscure clause in the post-2001 debt restructuring agreement, the judge prevented Argentina from paying any of its bondholders, with Argentina’s technical default the result.

For the hedgies, the outside chance they might reap a windfall has made Argentina a plaything. That toy is Argentina’s 43 million people, already coping with 40 per cent inflation ahead of a certain devaluation of the peso. But what do windfall-seekers in New York care about squalid living conditions in Buenos Aires slums?

The question answers itself. Until we have a global regulator that imposes common sense and, yes, moral virtue in these debacles, no one is safe from the speculators who profit from triggering uncertainty and fear.

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